I figured since I am the (self-proclaimed) Chart Shark, I should probably give some basic idea of how to read stock charts. I wrote a post a while ago that was pretty much a joke regarding the subject, but sometimes I forget that people are looking for real information.
3 Types of Stock Charts
Reading stock charts is actually quite simple. There are 3 main types of online stock charts that you’ll find. Lines charts, bar charts, and candlestick charts. The first I want to cover is the line chart. This chart is almost completely useless as a day trading chart. If you watch it during the trading day, it just sits there and wiggles about and doesn’t give much real information. Even using it to analyze stocks on a day-to-day basis is pretty useless because it doesn’t give you any idea about what happened during that day. If you’re online day trading, stay away from line charts.
OHLC Charts, or bar charts are the next on the list. These charts are better than line charts because they give you a better visual idea of what’s happening in the market in real time. They are also easier to read than a line chart because, as the name implies, they give you the opening, high, low, and closing price on each bar. Each bar represents a time-frame of your choosing from months, to minutes. They aren’t the easiest to read quickly though, especially if you’re looking at a black and white bar chart. This requires a sharp eye to pay attention where those tails are in order to identify strengths and weaknesses in a trend, which is why the OHLC chart is inferior to the next chart on our list.
Japanese Candlestick Chart
The final, and best type of chart for intraday trading is the japenese candlestick chart. I find this to be the easiest chart to read, and analyze. Even single color candlestick charts can be easily read. This is because they use a “full” and “empty” candle stick to designate a decrease or increase in price. ”Full” or black candles indicate a decrease in price while “empty” or white candles represent an increase in price. The main parts of the candlestick are the body, and the wicks. The wicks indicate highs and lows in the price, while the top and bottom of the body indicate opening and closing price for the time-frame selected. If a candle consists of only wick with no body, this is called a doji. A doji occurs when the opening and closing price are the same or very close. They look like either a cross, and upside down cross or a plus sign, depending on the length of the wicks.
The candlesticks in a chart are lined up in series to give you a picture of intraday trading activities. Below is a free stock chart courtesy of BigCharts.com. In this chart below you can see that green candlesticks indicate an increase in price, while the red indicate a decrease.
The time frame for the chart is 5 minutes, which is the most useful for trading after 11am. Before 11am I prefer to use a 1 minute chart, though I will glance at the 5 minute chart to get an idea of the greater trend. Beyond that, before the market opens, I will also analyze the greater trends, and support/resistance of hourly and daily charts.
As you can see in the chart, the price ranged 2 points or 2 dollars for the day. There were probably several opportunities to make money on this stock. The interesting thing is that the days opening and closing price are only about .25 points apart, so the stock has hardly moved from one day to the next. There was certainly a possibility of making much more than that if you were watching this intraday chart.
The next piece of basic chart reading is the ability to identify trends. I have indicated some major trends on the chart above. The first trend on the left is a pretty vague trend. Ideally you want something more like the second or third trend where the candles touch the trend several times without breaking it. Some people will trade these breaks in trends. It’s not something I trade off of, but I will use trends as strength indicators, and I employ stock chart analysis to spot trading opportunities within the trend.
One final note in this basic article about how to read stock charts is that for online day trading, you’re obviously going to need stock charting software that displays real time stock charts. This is absolutely necessary for intraday trading because you need to see the chart form and the trades happen as they happen. You don’t want delayed information, because by the time you get that information the stock chart pattern you thought you saw might be 15 minutes old.